Economics of Economics of AgBiotechnologyAgBiotechnologyPresentation toPresentation to

NDSU Extension MeetingNDSU Extension Meeting

Sept 21, 2005 Sept 21, 2005 By William W. WilsonBy William W. Wilson

GREENLAND

CANADA

UNITED STATES

UNITED STATES(Alaska)

MEXICO

TopicsTopics

Overview and Motivation Major economic issues

Cost reductionsConsumer acceptanceSegregation, IP and traceabilityDistribution of benefits and costs

Challenges to agbiotechnology in future.

Studies on GM Wheat

Issues in Development and Adoption of GM Wheats, AgBioForum 6(3) 1-12;

Costs and Risks of Testing and Segregating GM Wheat, Rev of Ag. Econ

Adoption Strategics for GM Hard Wheats, Contracting Strategies for GM Hard WheatsCosts and Risks of Testing and Segregating GM Hard Wheats in Canada

Welfare Distribution of Introducing RRW in US and Canada Costs and Risks of Conforming to EU Traceability Requirements in NA Hard Wheats,

Games and Strategies in Introducing GM Hard Wheats in NATechnology Price Impacts of GM Technology in Hard Wheat (RRW and FRW)

Licensing and Stacking Games and Strategies in GM Hard Wheats

Background on Background on AgBiotechnology AgBiotechnology Adoption and Adoption and DevelopmentDevelopment

Harvested Acres for North Dakota,by Crop

Soybean Planted Area (000 A) 1995

Soybean Planted Area (000 A) 2004

Soybean Production 2004

GM Soybean Adoption in ND, SD and MN; 2000-2004.

ND Soybean Varieties

Revenue from oilseed production in North Dakota, 1995-2003

0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Rev

enu

e (i

n m

illi

on

s o

f $)

Soybean

Canola

Flax

Sunflower

5 10 15 20 25 30

ResearchBenefits

ResearchCosts

AdoptionProcess

Research anddevelopment lag

Annual Costs(-$ per year)

Gross AnnualBenefits($ per year)

Source: Alston et al. 2000.

Flows of A Biotech Research and Flows of A Biotech Research and Development Benefits and Costs Development Benefits and Costs Over TimeOver Time

Commercial View of Trait DevelopmentCommercial View of Trait Development

Time for Development: 8-10 yearsCost: $80-100 million (incl. 20-40$ million in costs to

conform to regulatory system)Risks

Technical feasilility--proof of conceptRegulatory Approval--US and ROWCommercial acceptance--price discounts

ƒUS and ROWƒConsumers vs. buyers

Competitor traits and technologiesPatent protection--for a period

Ag Biotech Product Development Ag Biotech Product Development

Year 0 1 2 3 4 5 6 7 8 9 10 Discovery

Gene/trait identification

Phase IProof of concept

Phase IIEarly

development

Phase IIIAdvanced

development

Phase IVRegulatory submission

High throughput screening

Model crop testing

Gene optimizationCrop transformationBio-evaluationGreenhouse and field trials

Trait developmentBio-evaluationField trialsPre-regulatory dataLarge scale transformation

Trait integrationField testingAgronomic evaluationRegulatory data generation

Regulatory submissionSeed bulk-up

(5%)

(25%)

(50%)

(75%)

(90%)

(Probability of Success)

Seeds and Traits being Field Tested by Agbiotech Firms

Company

Product Quality

Herbicide tolerant

Insect resistant

Agronomic properties

Fungal resistant

Virus resistant

Dow corn corn, cotton corn, cotton

corn

DuPont corn, soybean

corn, cotton

Syngenta corn rice, corn, sugarbeet

corn, cotton

corn wheat, corn,

potato, barley

beet, watermelon,

tomato

Monsanto corn, potato,

soybean

alfalfa, soybean, cotton,

rapeseed, beet, wheat, rice, potato

corn, cotton,

soybean

corn, soybean

Number of field test permits filed by private agbiotech firms, 1987-2004

0 1000 2000 3000 4000 5000 6000

Syngenta

Bayer

Monsanto

DuPont

Dow

Scotts

Seminis

Number of Field Test Permits

Number of field test permits filed by public institutions, 1987-2004

0 50 100 150 200 250 300

ARS

Iowa State

Montana St.

Purdue

U of Idaho

U of Minnesota

U of Neb./Lincoln

U of Wisconsin

NDSU

Number of Field Test Permits

Applications for Field Trials in North Dakota, by Crop, 1990-2004

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20040

10

20

30

40

50

Wheat Sunflower Soybean Safflower Rapeseed Potato Cotton Corn Beet Barley Alfalfa

Future New Traits (prospective)

GM row crops: soybeans, canola and corn Input traits:

Further refined input traits Output traits refined by feeding efficiency and ethanol

Output traits: Oil content, etc. Food use of oils BioDiesel (potential)

Wheat Fusarium Resistance (Syngenta) Drought Resistance (various state universities) RR…door open to be revisited Product quality: various forms

Other small grains—negligible Bio-Pharmaceuticals

Myths about AgBiotechnologyMyths about AgBiotechnology

Productivity gains/cost savings--typically understated!

Consumer acceptanceƒ selected claimsƒ GMA; other crops; and survey realitiesƒ segments in each market will persist

Segregation technology and costs

Economic Issue 1: Reduced cost of production and/or output trait Some agbiotech traits can

Reduce the cost of production due to the technology

Reduce the cost of competing inputs Reduce the cost of producing an output trait

RRW: Elements of Cost Savings RRW: Elements of Cost Savings

$/ac

Value of Yield (11-16%) 13.62 $/acAdopter Cost Savings 9.70Tech fee -6.00Dockage rem. costs 0.33 Total 18 $/ac

48 c/b18 $/mt

Sources of Cost Savings for RRW: Implied in Model Assumptions

Potential Decreases in Crop Potential Decreases in Crop Technology CostsTechnology Costs

Prices for competing chemicals: Soybeans post intro of RR reduced 40-50% glyphosate reduced 22% by 1998.

Proposed ND GM traits (Wilson and Huso--NDSU)ƒ Prices of competing products to RR: decrease 35%ƒ Prices of competing products to Fus Res: decrease 37%

Retail Price of Pursuit in North Retail Price of Pursuit in North Dakota, 1995-2002Dakota, 1995-2002

Prospective Adoption Rates for GM Wheats in ND

Allowing RRW, GM FRW, Stacked, and Conventional varieties:

Equilibrium adoption in US HRS areas:ƒ GM FRW 34%ƒ RRW 20%ƒ Stacked 31%ƒ Conventional 15%

Economic Issue 2: Consumer Acceptance

Who benefits: Producer benefits--cost reduction and/or increased yield Consumer benefits of producer traits

increased supply, reduced price, and/or new traitƒ Consumer benefits of output traits

What Do End-Users Want? What Do End-Users Want?

Difficulties in Defining Desired CharacteristicsWho is the buyer? Consumers, bakers, millers....Divergent interests (i.e., multitudes of products) leading to fundamentally different market segments (i.e. of desired characteristics)

Seeking information about characteristics that may not be currently available (e.g., storability, nutritional attributes)

Buyer acceptance--discussionBuyer acceptance--discussion

Claims of buyer aversion should be challenged ƒ US Domestic market is by far the dominant market:

70% of grocery products are GM; andbread has GM ingredients already

ƒ Buyers are naturally averse prior to trait gaining regulatory approvalƒ Buyers are not likley fully informed about the functional differences

ƒ Buyers typically express aversion in surveys; ƒ in practice accept the products (results of major survey of literature).

Be cautious of surveys!ƒ Experimental Auction results:

ƒ Suggest 7% of market is averse to products containing GM

Buyers Approach is EvolvingBuyers Approach is Evolving

Many countries do not have regulatory process with scientific integrety

Some will naturally adopt that of US, and, require certification (Philipines, China, Mexico)--Certificate of Free Trade

Application in the case of GM wheat—see below

Distribution of North American Market Segments

Consumer Acceptance: Summary

Evolving e.g., China

Segments: In nearly all mature markets, one should expect market

segments to emerge with respect to GM acceptance Due to demand, incomes, market maturity, regulations, etc. Natural process of market maturity

Segregation: Buyers in most cases have found, or are finding ways to

make purchases of non-GM even though GM may be the predominant crop Numerous examples in US on corn and soybeans Brazil routinely serves both market segments etc

Economic Issue 3: Segregation, IP and Traceability

Spectrum of Procurement Spectrum of Procurement StrategiesStrategies

Spot Market

gradesproteinF.N.T.W.

VerticalIntegrationTesting &

SegregationTargeting Contract

Production

IdentityPreservation

TraceabilityProc. certif.

ByLocation

Pre-Shipping

Pre-Processing

Origins Varieties Prod.Practices

Acres Prod. Practices

QualityReq't.

Assets Grain

IP/Segregation are not synonomousIP/Segregation are not synonomous

IPƒ Desired processes are declaredƒ Audits conducted using varying mechanismsƒ Paper trail (sometimes)ƒ Identity if preservedƒ Tests may/may not be component of system

Segregationƒ Grain is segregated based on varying forms of information:

testsvariety declarationhunches!

ƒ Maintained throughout system in response to incentivesƒ Tests assure integrity of segregations

GM Averse buyers very likely want tests/segregations and traceability, not IP

Results from Segregation Studies

Specialization will reduce Specialization will reduce risks/costsrisks/costs

Likely specialization with respect toƒ geographyƒ handlersƒ farmers

Mitigation of risks and costs: All of these would mitigate broader risks to system

Recent Survey of Upper Midwest Elevators

IP and GM Marketing 89% handle GM grains 18% handle IP 57% use mechanisms of proof 19% ask for variety declaration

Certification 22% HAACP and 19% ISO certified

Segregation Percent of grain segregated: 36% Average cost=7c/b

Greater for small elevators than large Cost of modification for enhanced segregation:

$200,000 or 8c/b

Traceability: European Requirements April 2004:

End of the moratorium (in force since 1999). EU allows grain from countries using GM seed

under restrictive conditions: Labeling of product containing more than 0.9% of approved

GM material. Maintaining high level of traceability

January 2005: Traceability is obligatory for all food and

ingredients.

Traceability

Defined in 1987 (NF EN ISO 8402) as the ‘Ability to retrace history, use or location of an entity by the

means of recorded identification’. Ability to trace GMOs and products produced from GMOs at all

stages of their placing on the market through the production and distribution chains’ (EU Parliament, 2003)

Requirements for Non-GM Grains On-Farm: Isolation between GM and Non-GM fields, Buffer stocks, Cleaning,

Storage adapted, Auditing, Certification, Testing, Traceability,…

One step back and one step forward: system to identify to whom and from whom products are made available.

Transmission of specified information concerning the identity of a product to the next agent: certification record, test records,…

5 years period of recordkeeping.

Labeling: “this product contains genetically modified organisms” if exceeds the 0.9%

threshold.

Costs and Risks Management Strategy Conforming EU Requirements

Research supported: NDSWC and SBARE Prospective costs and risks for wheat from ND to

conform to EU traceability requirements Research report: available Costs include

On-farm: isolation, certified seed etc. Lower yielding (efficient) varieties vs. GM technology

Off-farm: testing, segregation, traceability certification Risk premiums

Base Case Results: Elements of Costs (related to GM Wheat)

21

1

21

25

0

10

20

30

40

50

60

Base Case

Co

sts

(c/N

on

-GM

bu

)

Quality Loss

Traceability Cost

Testing Cost

Risk Premium

On-Farm Cost

Conclusion

Risks can be managed, Buyer Risk: 0.01% Seller Risk: 1.73% Risk Premium/Non-GM bu = 21 c/bu

Total cost about 50c/bu, Dominant costs are risk premium and on-

farm practices.

Economic Issue 4: Distribution of Benefits and Costs of AgBiotechnology

RRW Case Study: Background Weed pressures in HRS Field trials in HRS and CWRS areas Opposition began from numerous fronts

Welfare analysis How are benefits of a new technology

distributed? Consumers—lower prices Producers—lower costs Regulations/GM aversion distort results

Changes in Welfare by ScenarioChanges in Welfare by Scenario

Change in Producer Welfare:by Change in Producer Welfare:by ScenarioScenario

Change in Consumer/Import Change in Consumer/Import Welfare:by ScenarioWelfare:by Scenario

Intuition to Results II: Intuition to Results II: Intro of RRWIntro of RRW

Producers benefit +$197 MillAfter considering all other costs/benfits explicitly modeled

Consumers benefit (in total) +$163 millionreduced prices/increased supply

Consumers of non-GM segments: Reduced welfare due toƒ higher cost technology (forgo yield increases and on-farm cost savings)ƒ require segregation costsƒ non GM must compete with RRW, other crops and markets with no segregation costs

ƒ Longer-term: may have to compete against products not requiring non-GM

Summary and Future Challenges

Major changes occurring in agriculture as a result of the introduction of agbiotechnology into crops Increased profitability Changing cropping patterns

Major economic issues Production costs: Decline as result of new technology Consumer acceptance: Evolving; but, highly fragmented Segregation/IP/Tracebility: Systems are evolving and US

handlers are penetrating these segmented markets fairly efficiently

Distribution of benefits: GM traits result in consumer and producer benefits; but, reduced benefits to those not adopting/accepting of the technology

Future ChallengesFuture Challenges Escalation of GM traits

More specialized and focused on specific segments and industries Identifying desired traits: Major challenge for future

Smaller segments Consumers preferences likely reflect different desired characteristics;

hence making targeting of traits more difficult GM traits provide N. America an advantage—first mover advantage

Due to the legal system to facilitate intellectual property rights, vs. that in many other countries

Small Grains Small acres base relative to corn and oilseeds Consumer acceptance more fragmented Challenge to encourage agbiotech investment and/or risk continued loss of

area planted: small grains becoming increasing more of specialty crop GM Research and Investment

Cost, risk and time required for trait development Requires increase in partnering across system for effective

commercialization